A few Q's about Inside IR35 Calcs

[PTP]

I've seen plenty of "Impact of IR35" calculators on the net, unfotunately giving a fairly wide range of answers. So I want to understand how it's calculated. I've read HM Revenue & Customs: and had illustrations from my accountant. I'll be asking the accountant questions about the illustration but I'm keen to ask them here as well

The illustration they've given shows the company as still making a profit of £1,700 and there being a maximum net dividend of £1,700.
Why isn't the profit zero? Why isn't the salary £1,700 ish higher to make profit zero?

They've shown accountants fees of £1,600 and that being the only company expense. I was expecting them to show 5% x Company income as the expenses instead. Does what they've done agree with your knowledge?


Thanks

[Greg@CapitalCity]

Hi PTP,

The profit probably comes from the company not claiming its full 5% in expenses allowed for in the IR35 calculation. Generally speaking the IR35 calculation is;
(1) Add all your IR35 income together, and deduct 5% from this;
(2) From (1) deduct any allowable expenses, capital allowances, pension contributions, gross salary already paid, employers NI already paid, and any benefits in kind paid to you;
(3) The result the total of your deemed salary payment and employers NI. Split out the employers NI, and you are left with your deemed salary payment on which PAYE/NI is calculated;

So for example, if all your work is caught by IR35, and you have no expenses other than your accountants fee, and assuming you earn £100,000 per year;
(1) £100,000 less 5% = £95,000
(2) No other expenses (accounting fees are included in the 5% expenses allowance above);
(3) Deemed payment + employers NI = £95,000

And the tax position for your company is;
Income = £100,000
Expenses = £96,600 (the £95,000 calculated above, plus your £1,600 accountants fee)
Profit = £3,400
Corporation tax @ 20% = £680
Net profit after tax = £2,720 (this is how much you can take as a dividend)

Hope that helps you understand the dividend concept OK. And if you did take that dividend payment, you would be taxed personally at the higher rate of 25p per £1 of net dividends paid.

[Clare@InTouch]

I've seen plenty of "Impact of IR35" calculators on the net, unfotunately giving a fairly wide range of answers. So I want to understand how it's calculated. I've read HM Revenue & Customs: and had illustrations from my accountant. I'll be asking the accountant questions about the illustration but I'm keen to ask them here as well

The illustration they've given shows the company as still making a profit of £1,700 and there being a maximum net dividend of £1,700.
Why isn't the profit zero? Why isn't the salary £1,700 ish higher to make profit zero?

They've shown accountants fees of £1,600 and that being the only company expense. I was expecting them to show 5% x Company income as the expenses instead. Does what they've done agree with your knowledge?


Thanks

As Greg says the reason there is profit can be due to the company not using the full 5% allowance for expenses. It can also be due to calculation differences - accounts are prepared on an accruals basis (what you invoice) whereas IR35 deemed payments are calculated on a cash basis (what you receive). There can therefore be timing differences from year to year.

That extra £1,700 could go as salary if you wanted it to, but it's more tax efficient to leave it, pay CT, and then take it as a dividend or leave it within the company.